Throughout the past three years, Egypt has been through tough but necessary economic reforms, undertaken by the authorities and supported by the International Monetary Fund (IMF).

Aiming to improve Egypt’s public finances, curb the budget deficit, and get the currency shortage under control, all while achieving sustainable growth, the authorities adopted a different set of economic measures, including; currency flotation, subsidy cuts, implementation of the VAT, and introducing social protection programmes.

Hisham El-Khazindar, the co-founder and managing director of Qalaa Holdings(Photo by Ahmed Hendawy)

To get a better understanding of where the Egyptian economy stands and the best way to move forward, Daily News Egypt sat down for an interview with Hisham El-Khazindar, the co-founder and managing director of Qalaa Holdings, a leading investment company in Africa and the Middle East, focusing on energy, cement, transportation, and logistics, agri and mining.

El-Khazindar’s journey from a graduate of AUC (which he now serves as a Trustee), the first part of his career at EFG-Hermes, through picking up an MBA from Harvard (where he now serves on the Global Alumni Board), to co-founding and running one of Africa and the Middle East’s leading investment firms, and his experience, internationally recognized through awards such as the Young Global Leaders and the Choiseul 100 Africa, makes him the ideal candidate to answer such questions. The first thing you notice about El-Khazindar is that he knows what he’s talking about, he is not afraid to say what he thinks and he will not let one success distract him from the next. The transcript for which is below, lightly edited for clarity:

Almost two years since start of economic reforms, many of which you had previously forecasted, how do you view Egyptian economy, what next steps do you have in pipeline?

We need to give credit to our country’s leadership and government for the decisiveness and effectiveness with which some very difficult but necessary fiscal and monetary reforms have been implemented over the past couple of years. And to give credit to the Egyptian people for their resilience in absorbing this bitter medicine. Egypt’s finances and prospects today look much brighter than they did these past years.

In terms of next steps, keeping the reform momentum is of great importance. Historically in Egypt, there were some reform attempts, where partial reforms were implemented, but progress was unfortunately not sustained.For instance in the early 2000s there was some positive trade, tax, and customs reforms undertaken by the government at the time, which led to strong growth figures for a few years, however the authorities then shied away from tackling other necessary reforms such as the subsidies system, and as a result the achieved growth was neither inclusive nor sustained.

The real challenge going forward is staying the course, which will entail sustaining and broadening the reform, in order to attract the level of both domestic and international investments needed year after year to create decent jobs and truly lift over the coming years the standard of living of the average Egyptian.

We need to give credit to our country’s leadership and government for the decisiveness and effectiveness with which some very difficult but necessary fiscal and monetary reforms have been implemented over the past couple of years(Photo by Ahmed Hendawy)

What main challenges authorities need to tackle from your perspective?

I believe that the main challenge going forward is in significantly improving the business climate, and the ease of doing business, and supporting the private sector, from SMEs to large companies. The government deserves credit for already implementing a number of long awaited steps and reforms, including the New Investment Law, yet there is much more to be done. Egypt is a country where, whether you are large local company, or even more so if you are a young entrepreneur or a foreign company entering the market, it remains slow and costly and difficult to start a new company or project, to get all the required licenses, to operate, expand, or if needed wind down. Our legal framework needs a serious overhaul and update, which is underway, but equally importantly, the procedural framework, related to the government employees, and bureaucracy, needs to be radically simplified.

Some will say it’s an impossible challenge, that Egypt’s bureaucracy cannot be reformed. But remember people used to say the same things about subsidies, that they could not be touched. Until they were, by a decisive leadership.

Revolutionising Egypt’s business climate in the next few years is the next big challenge that the government should tackle persistently, to allow our country to reap the full benefits of the economic reforms undertaken earlier.

How can government improve ease of doing business?

Well, there is no single solution. There are multiple angels one of which is e-government, automization, digitization and transactional services. This not only would revolutionize the speed, efficiency and effectiveness of government services delivery and administration but will also reduce costs and make it possible to identify and measure return on government investment.

We do not need to reinvent the wheel, just as we did not reinvent the wheel when we adopted the sound monetary and fiscal reforms implemented this past couple of years. We can learn from the experience and models of other countries that have underwent similar transitions, just as we did with our phasing out of energy subsidies and the introduction instead of conditional cash transfers.

Take Turkey for example—despite our political disagreements and their current economic woes—20 years ago they had a bloated public sector and bureaucracy like ours. Nowadays, Turkey’s total public sector employees are under 1m, compared to 6-7m for Egypt. Red tape is not just about the number of public sector employees of course, and any such transformation of our public sector needs to be very gradual and to take into account social aspects. My point however is that no national challenge is unsurmountable if you have a clear strategy and long-term plan.

Why is this issue of ease of doing business so critical? The last two years witnessed a number of very painful decisions, such as the currency devaluation and the gradual liberalization of energy prices, which severely reduced the purchasing power of the average citizen. These were necessary conditions, but not on their own sufficient conditions, to stimulate the boom in investment needed to achieve economic growth. Investment leading to growth, sustainable inclusive growth, is the goal here. Growth that creates decent jobs, which in turn leads to better living standards, and purchasing power, in a sustainable way.

The state currently is trying to overcome this issue by directly implementing mega-projects, which is a very important role, and was needed in some sectors, such as power generation, where Egypt had a large generation capacity deficit. However, it’s virtually impossible for any country to achieve economic growth through public investments only, The state has a very essential role to play as a catalyst, but alone can’t deliver the 6-7% gross domestic product (GDP) growth needed in a sustained way, for 10-15 years, to achieve an economic renaissance, a real leap in incomes.

This can only be done by creating a business climate that is supportive of the private sector. And by private sector I mean not just large local corporates, but also young entrepreneurs, innovators, SMEs, foreign investors, etc. Egypt has already implemented the hardest of reforms, but the payoff from these reforms, the significant increase in investment flows needed to generate real growth, will not be achieved without significantly improving the ease of doing business, empowering the private sector, and curbing bureaucracy.

How do you view government IPO programme for state-owned companies, whether good step, toward privatisation?

It is a good start. A real problem is privatisation has a such a bad reputation in Egypt, which is unfortunate. This is the result of poor transparency and communication on the part of previous governments, and the perception that companies were sold too cheaply by the state, or resulted in mass layoffs, or that the disposal processes were corrupt. While this might have been true in a few instances, I suspect that an objective assessment of Egypt’s privatization experiences in the 1990s and 2000s would find it overall successful. If you look at the cement sector, for example, the best performing and most modern companies were the ones that were privatised, on the other hand, the most dilapidated ones, that have the greatest labor issues, and have the worst environmental impact, are those that have remained in the state’s hands. The same applies across many other sectors.

Yet, it is a good start, I hope that more companies will be offered, and larger stakes in these companies sold, in a fair and transparent manner, and for this process to be accompanied with awareness campaigns.

Moving on to Qalaa Holdings, company considered largest investor in Egypt’s energy sector, when can Egyptian Refining Company (ERC) be operational, and do you plan to expand in renewable energy following Benban 50MW plant?

Since 2014, we decided to evolve from a a company that had a very diversified set of subsidiaries across many sectors, to a much more focused one, with the energy sector as a key priority.

We are very proud that after several challenging years, ERC, our largest single investment, and the largest project led by a private Egyptian company this past decade, with a total investment cost of around EGP 80 billion, is now 98% complete. The construction phase is now almost entirely behind us, with the commissioning and testing of the refinery commencing.

The pilot operations will start with the end of 2018, to be increased gradually. Our technical consultants believe that the full commercial production can be achieved in around 6-9 months, so at some point in 2019, ERC is expected to reach its full commercial production. It will generate revenues and cash flows in 2019, which will be reflected in Qalaa’s financial statements.

We are also very bullish about growth opportunities in our downstream energy subsidiary, TAQA Arabia, where we started work on our EGP 1.35bn 50 MW power plant in Aswan’s Benban.

In parallel, with the Benban project, TAQA has been expanding its petrol stations network, two years ago the company had around 20 petrol stations, today we have reached the 51 stations mark, and aim to reach 100 by 2020. TAQA has also been a leader in natural gas distribution in Egypt, and we hope to celebrate before the end of this year reaching 1 million households having been connected with gas through TAQA.

As we think of Qalaa’s next phase of growth and investment, we consider our 50 MW solar plant as a starting point, we believe that Egypt has a great competitive advantage in the solar energy field. And while we will remain focused on our core sectors, we see a link between solar energy, and the area of water desalination, which we are currently studying. As a company we always look at the big picture challenges facing the country and aim to play a constructive role in addressing them as we have with the energy sector.

Deleveraging Qalaa, reducing our level of debt and liabilities relative to cash flows, and improving our liquidity, both at the holding and subsidiaries level, remains a key priority. (Photo by Ahmed Hendawy)

How do you finance these project, as Qalaa previously focused on debt restructure?

Deleveraging Qalaa, reducing our level of debt and liabilities relative to cash flows, and improving our liquidity, both at the holding and subsidiaries level, remains a key priority.

While this deleveraging was driven mainly by our program of disposals of non-core assets since 2015, this is now coming close to an end with only a couple of assets still to be exited. Going forward, the servicing and reduction of our debt will come primarily from the improving cash flows across our businesses. Our share of ERC’s cash flows in the coming years will clearly be a big contributor.

But deleveraging as a holding doesn’t mean that our individual companies will not grow or seek debt financing at reasonable levels alongside their internally generated cash flows, on the contrary. For example, in a “safe” project such as the Benban solar plant, with the Egyptian government as the counterpart purchasing the power to be generated, around 70% of the investment cost was financed by debt from the IFC, with the balance financed by equity from TAQA’s retained earnings, as well capital from its co-investor in the project.

And as we have previously disclosed, Qalaa also seeks to increase its stake in ERC, and the financing of the purchase of this additional stake may include some debt.

What can be acceptable debt range, or leverage ratio that you plan to reach?

I would like our consolidated debt/ EBITDA ratio not to exceed 2 times by 2020.

Solar power plant project leverage ratio was 70-30, do you plan to keep this ratio for future projects?

In the solar power project, and similar renewable energy projects in general, the leverage is 70-30 because at the end of the day the state is the counterpart that is going to purchase the energy generated, under the feed-in-tariff agreement, so the project has a clear, and predictable income, allowing it to be able to sustain such high leverage ratio.

However, if we have a different type of project that primarily deals with the private sector, farmers, etc.., this high level of leverage would not be acceptable, we can think of 60-40, or 50-50.

Following UAE’s ADNOC successful IPO, can you state your IPO plans for TAQA Arabia?

We are waiting for the Benban project to be operational, and visible in TAQA’s cash flows, and that our growth plans to be fully determined, once that this happen, assuming that the market condition will permit, we are planning to IPO shares in TAQA Arabia in the second half of 2019.

Authorities aim to liberalise natural gas market, can you elaborate on Qalaa’s plans in regard to gas market?

TAQA is currently the leading private natural gas distributor, and the company was one of the first to submit an expression of interest in gas trading once there was a legal framework to do so. We plan to continue in expanding our current scope of work, which is connecting households to natural gas grid, as well as diving into gas trading which plan to do in parallel with our current scope.

I believe that 2019 will witness a renaissance in the natural gas sector in Egypt, with the continued growth in production of the giant Zohr gas field and other discoveries, the plans for the pipeline with Cyprus, Egypt is poised to become a regional gas hub, of which we hope that TAQA will play a role in.

When can we expect Qalaa’s turning point, starting to generate profit?

We are currently at an inflection point. I view last year, 2017, as our last year of “clean-up”, where we had significant losses resulting primarily from large write downs and impairments. 2018 is the turnaround year, with our Q1 results demonstrating strong growth in revenues and EBITDA at the group level, which will be sustained for the remainder of the year. In 2019, as ERC comes on stream, I believe we will return to profitability.

Our Nubaria Nile port has turned into an integrated logistical hub, with storage facilities, bonded warehouses. Most of the largest cargo companies now use our storage facilities in Nubaria, which is evolving into a natural extension of the congested Alexandria port.

We started constructing grain silos as well, and are expected to be completed by 2019, turning us into a full logistics solution company.

Following the increase in kerosene prices, the original thesis that we had is starting to be validated, as transport through Nile River become more feasible.